United States: Pension Plan Withdrawal Liability Imposed On Investor Private Equity Funds

Last Updated: April 14 2016
Article by Victoria H. Zerjav and Austin K. Stack

Victoria H. Zerjav is a Partner in our Stamford office.


  • In the latest decision in the Sun Capital series of cases, the U.S. District Court for the District of Massachusetts held that private equity investment funds can be liable for the withdrawal liability of a portfolio company.
  • The Sun Capital private equity funds were found to be engaged in a "trade or business" under the U.S. Court of Appeals for the First Circuit's 2013 "investment plus" test and were also under "common control" with the portfolio company, applying a new "partnership-in-fact" test.
  • The case has implications for traditional private equity funds that have more rights than a passive investor in regards to investments in portfolio companies with pension liabilities. It also may have implications for other employee benefit liabilities.

The latest decision in the series of Sun Capital cases was released on March 28, 2016, by the U.S. District Court for the District of Massachusetts. In Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund., No. 10-10921-DPW (D.Mass. 2016), the court ruled on questions remanded by the U.S. Court of Appeals for the First Circuit in 2013 in Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund 724 F.3d 129 (1st Cir. 2013).

The First Circuit ruled in 2013 that the private equity fund, Sun Capital Partners IV LP (Sun IV), was engaged in a "trade or business." The District Court was asked to determine if the other private equity funds, Sun Capital Partners III LP and Sun Capital Partners QP LP (collectively, Sun III), were also engaged in a "trade or business" and whether Sun III and Sun IV were under common control with the portfolio company, Scott Brass Inc. (SBI). If they were, the funds could be held liable for the portfolio company's withdrawal liability under the Employee Retirement Income Security Act of 1974 (ERISA) and the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA). The District Court ruled that Sun III was a "trade or business," and that Sun III and Sun IV were a "partnership-in-fact" under common control with SBI. Thus, the court held that the two private equity funds are jointly and severally liable for SBI's withdrawal liability of more than $4.5 million.

Background and the First Circuit Decision

Under ERISA, as amended by the MPPAA, an "employer" is liable to a multiemployer pension plan when it withdraws from the plan. To be considered an "employer" for purposes of withdrawal liability, an entity must 1) be a "trade or business" and 2) be under "common control" with the entity directly obligated for the withdrawal liability.

In 2007, Sun III and Sun IV acquired SBI, with Sun III owning 30 percent and Sun IV owning 70 percent. In 2008, SBI filed for bankruptcy, triggering withdrawal liability. The issue was whether the private equity funds were engaged in a "trade or business" and under "common control" with SBI, so as to make Sun III and Sun IV liable for SBI's withdrawal liability under ERISA.

The First Circuit ruled that Sun IV was engaged in a "trade or business" after applying an "investment plus" test, which essentially asked 1) whether the entity is engaged in an activity that is more than just passive investment with the primary purpose of income or profit and 2) whether the entity conducted that activity with continuity and regularity. The First Circuit noted that both funds were "actively involved" in the management of SBI, including having the ability to make hiring, termination and compensation decisions for SBI. Of particular importance to the court was that Sun IV received a financial benefit from its involvement with SBI in that SBI paid more than $186,000 to Sun IV's general partner, which reduced the amount of management fees that Sun IV had to pay. The First Circuit noted that this benefit was one that an "ordinary, passive investor would not derive." The First Circuit directed the District Court on remand to determine whether Sun III received a similar offset benefit.

Sun III Engaged in a "Trade or Business"

The District Court determined that SBI made payments to Sun IV's general partner that, under the joint ownership arrangement, would partially offset management fees that Sun III owed and provide an economic benefit to Sun III, albeit indirectly. Accordingly, the court ruled that the combination of the Sun III economic benefit and Sun III actively managing SBI meant that Sun III was engaged in a "trade or business."

The District Court noted that under the partnership agreements, the fees that SBI paid to the general partner generated a carryforward amount that could reduce future management fees owed. The carryforward amount satisfied the First Circuit's question regarding whether Sun III received "any benefit" from the fees that SBI paid. The court noted that this benefit was not available to a passive investor.

Sun III and Sun IV Are Under Common Control With SBI

Two or more "trades or businesses" are under "common control" if they are members of a "parent-subsidiary" group, a "brother-sister" group or a "combined group," according to Internal Revenue Code Section 414(c) and its regulations. To form a parent-subsidiary group – the relevant category in the Sun Capital cases – a common parent organization must own a "controlling interest" in at least one other organization (a controlling interest is defined as 80 percent ownership).

The District Court determined that the funds formed a parent-subsidiary group with SBI because they formed a partnership-in-fact that owned 100 percent of SBI. The court acknowledged that the funds filed separate partnership tax returns, had separate financial statements and separate bank accounts, and explicitly disclaimed an intent to form a partnership or joint venture. However, the court rejected the argument that it should strictly adhere to organizational formalities and noted that the funds created a sub-entity to invest in SBI, invested similarly in five other transactions and more importantly, worked together to decide how to co-invest. The 70/30 ownership split was a decision made by the funds' controlling entities at the outset of the investment to jointly divide responsibilities and keep each entity's ownership under the 80 percent threshold to avoid either fund formally establishing a controlled group with SBI to thereby limit exposure to withdrawal liability. Finally, the court noted that the organizational choices of the funds show "unity of decision making between the Funds rather than independence and mere incidental contractual coordination." The District Court declared that such activity "was plainly intended to constitute a partnership-in-fact." Consequently, the funds were found to satisfy the "common control" requirement. The District Court also noted that under the analysis provided by the First Circuit, the partnership-in-fact was also a "trade or business," and so each fund was liable for SBI's withdrawal liability.


The decisions in the Sun Capital cases create considerable uncertainty for private equity funds regarding their portfolio companies' withdrawal liability. Both courts, eager to find a way to impose liability on the funds, refused to provide any clear guidance as to what exactly will satisfy the "investment plus" standard or what factors will be sufficient for a private equity fund to be considered a "trade or business." However, it is clear that an entity's degree of managerial involvement (even through subsidiary entities) and receipt of economic benefits not provided to an ordinary passive investor will be key factors. Additionally, the District Court's decision establishes that structural formalities and state law may be disregarded in determining whether a private equity fund is under common control with a portfolio company, and so careful structuring alone may not be sufficient. Thus, for example, welcoming independent third-party investors in portfolio companies may help to minimize the risk of a fund being under common control with a portfolio company.

The implications of the decisions coming from the Sun Capital cases should not be taken lightly for both future investments and the management of risks in current investments of private equity and other investment funds. Given the factors the District Court focused on, private equity funds may want to consider the following to avoid having two or more funds form a controlled group with a portfolio company through a partnership-in-fact: 1) avoid multiple co-investments with the same fund entities, 2) limit the investment administration and managerial rights granted to the fund entities, 3) avoid substantively identical governing documents for co-investing funds, 4) have the funds co-invest with different outside entities and 5) seek outside funds with independent ownership and management to become minority owners in a portfolio company. Also notable is that under the definition of "employer" for withdrawal liability purposes, it may be possible for one portfolio company to be jointly and severally liable for a peer portfolio company's withdrawal liability if the two form a "brother-sister" controlled group.

Most significantly, private equity funds will want to be especially aware of any unfunded pension liability that a potential portfolio company may have. The same reasoning and rationales in the Sun Capital decisions could easily apply to defined benefit plan funding liabilities. There is a premium in performing diligence on any kind of pension liability (under single or multiemployer plans) and understanding the calculation of pension funding and multiemployer plan withdrawal liability. Further, even though beyond the apparent scope of the decision that relates to ERISA controlled group rules and not tax rules, a court could also choose to apply the District Court's analysis in connection with other employee benefit plans in which controlled group determinations are relevant. Examples include nondiscrimination and coverage testing in pension plans, including traditional 401(k) plans, and the Patient Protection and Affordable Care Act "pay or play" penalties relating to offering and providing affordable healthcare coverage. Finally, although the District Court's ruling is currently not binding outside the District of Massachusetts, the funds will likely appeal, and the decision could be binding in the First Circuit if upheld. Courts in other circuits may find the reasoning persuasive and rule similarly despite not being bound by the decision.

Private equity funds provide an important resource for small and growing businesses needing funds, management support and opportunities for liquidity for small business owners. The potential for withdrawal and other underfunded pension liability may change the landscape for private equity funds. As the Sun Capital cases have demonstrated, controlled group liability issues for private equity funds are not likely to altogether disappear, and the analysis for investing in, managing and taking risks in portfolio companies with any potential pension liabilities will necessarily need to adapt as a result. Perhaps one of the most significant impacts of the Sun Capital cases will be the decreased willingness of free market investors to take risks on pension-heavy companies and the value any investor will be willing to pay for such companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions